What Is a Profit & Loss Statement?
A Profit and Loss Statement (P&L), also called an Income Statement, is a financial report that summarizes your business's revenues, costs, and expenses during a specific time period — usually monthly, quarterly, or annually. It answers one core question: Did the business make money during this period?
Your P&L is one of three core financial statements:
- Profit & Loss (Income Statement) — shows revenue, costs, and profit over a period
- Balance Sheet — snapshot of assets, liabilities, and equity at a point in time
- Cash Flow Statement — shows actual movement of cash in and out over a period
Of these three, lenders most commonly start with your P&L — it's the quickest way to understand the health and trajectory of a business. Every number on your loan application ultimately traces back to your P&L.
Anatomy of a Profit & Loss Statement — Annotated
Below is a sample P&L for a mid-size service business, with every line explained. The structure applies to virtually any small business — your specific line items will vary, but the sections are universal.
ABC Contractor Services, LLC — Profit & Loss Statement
12 Months Ended December 31, 2025 | Accrual Basis
REVENUE
Gross Revenue / Sales
Total billings before any deductions. For service businesses, this is fees charged. For retailers, it's total sales. Also called "top line."
$842,000
Less: Returns & Allowances
Refunds, credits, and discounts given to customers. Subtract from gross revenue.
($12,400)
Net Revenue Key Number
Revenue after returns. This is the "real" revenue number. Lenders look at net revenue trends year over year.
$829,600
COST OF GOODS SOLD (COGS) / COST OF SERVICES
Direct Labor (field/production)
Wages paid to employees who directly produce the product or deliver the service — not office or management staff.
($198,000)
Materials & Supplies
Raw materials, components, or supplies used to produce the product/service. Varies directly with output volume.
($143,000)
Subcontractors
Payments to third-party contractors to fulfill work. Common in construction, IT, and staffing. Part of COGS because it's directly tied to production.
($87,000)
Total COGS
Sum of all direct production costs. The higher this is relative to revenue, the lower your gross margin.
($428,000)
GROSS PROFIT Key Number
Net Revenue minus COGS. Gross profit % (gross margin) = Gross Profit ÷ Net Revenue. Tells you how efficiently you produce — before overhead. This business: $401,600 ÷ $829,600 = 48.4% gross margin.
$401,600
OPERATING EXPENSES (Overhead)
Salaries & Wages (office/management)
Compensation for non-production staff: office manager, bookkeeper, sales, management. Not tied directly to production — they're here in operating expenses, not COGS.
($124,000)
Owner Compensation
Salary or draws taken by the owner. If you're an S-Corp, this is your W-2 salary. Lenders add this back when calculating true EBITDA for owner-operated businesses.
($72,000)
Rent / Lease
Office, warehouse, or retail space. Fixed cost — doesn't change with revenue.
($42,000)
Insurance
Business liability, property, workers comp, vehicle insurance. Fixed overhead.
($18,600)
Vehicle / Equipment Expense
Fuel, maintenance, and repairs for company vehicles not included in COGS. Often mixed between COGS (field vehicles) and operating expenses (admin vehicles).
($22,400)
Marketing & Advertising
All marketing spend: digital ads, print, trade shows, website, SEO, social media.
($14,800)
Professional Fees (legal, accounting)
Attorney fees, CPA/bookkeeper costs, consulting fees. Overhead, not production cost.
($8,200)
Utilities
Electric, gas, water, phone, internet for office/business location.
($6,400)
Depreciation & Amortization
Non-cash accounting expense that spreads the cost of assets over their useful life. Lenders ADD THIS BACK when calculating EBITDA — it doesn't represent actual cash spending.
($16,200)
Total Operating Expenses
($324,600)
OPERATING INCOME (EBIT) Key Number
Gross Profit minus Operating Expenses. Also called EBIT (Earnings Before Interest and Taxes). This is your "core business profit" before financing costs and taxes.
$77,000
OTHER INCOME / EXPENSES
Interest Expense
Interest paid on loans, lines of credit, MCA factor cost. This is a financing cost — it's why EBITDA (which adds back interest) is used to compare companies with different capital structures.
($14,800)
Other Income
Equipment rental income, insurance proceeds, interest earned, SBA EIDL forgiveness, or any non-operating income.
$4,200
NET INCOME
NET INCOME (Net Profit) Key Number
Revenue minus ALL costs and expenses. The "bottom line." This business: $66,400 ÷ $829,600 = 8% net margin. For S-Corps and LLCs, taxes pass through to owner's personal return — they don't appear here.
$66,400
The 5 Numbers Lenders Pull From Your P&L
When a lender (bank, SBA, or MCA provider) looks at your P&L, these are the five numbers they calculate and why:
1. Gross Margin %
Gross Profit ÷ Net Revenue × 100
Measures production efficiency. How much of each revenue dollar survives after direct costs?
Example business: 48.4%
Industry benchmark varies widely — see table below
Industry benchmark varies widely — see table below
2. Net Profit Margin %
Net Income ÷ Net Revenue × 100
Overall business profitability. The "bottom line" as a percent of revenue. Most lenders want to see positive trend.
Example business: 8.0%
Strong for construction; weak for SaaS
Strong for construction; weak for SaaS
3. EBITDA
Net Income + Interest + Taxes + D&A
Operating cash-generating power. Lenders use EBITDA to calculate DSCR — the #1 metric for loan decisions.
Example business: $97,400
($66,400 + $14,800 + $0 + $16,200)
($66,400 + $14,800 + $0 + $16,200)
4. DSCR
Annual EBITDA ÷ Annual Debt Payments
Debt Service Coverage Ratio — can this business service the loan? SBA requires 1.25x minimum.
Example: $97,400 EBITDA ÷ $60,000 debt = 1.62x — Approvable
5. Revenue Trend
(Current Year − Prior Year) ÷ Prior Year
Year-over-year revenue growth. Lenders want to see consistency and growth, not declining revenue.
Target: Positive or stable
Declining revenue raises underwriting flags
Declining revenue raises underwriting flags
Industry Gross Margin Benchmarks
Gross margin (gross profit %) varies dramatically by industry. A 35% gross margin is excellent for a restaurant but alarming for a software company. Use this table to benchmark your P&L against typical ranges for your sector.
| Industry | Typical Gross Margin | Typical Net Margin | Notes |
|---|---|---|---|
| Software / SaaS | 70–85% | 15–25% | Low COGS (server costs), high R&D overhead |
| Consulting / Professional Services | 60–75% | 10–20% | Labor is COGS; overhead is modest |
| Healthcare / Medical | 40–60% | 5–15% | High billing complexity, insurance reimbursement |
| Retail | 30–50% | 2–8% | Competitive, thin margins; volume-dependent |
| HVAC / Plumbing / Electrical | 40–55% | 8–18% | Materials + labor-heavy COGS |
| General Contracting (Construction) | 20–40% | 4–10% | High subcontractor and materials cost |
| Restaurants / Food Service | 60–70% (after food/bev only) | 3–9% | Prime cost (food + labor) typically 55–65%; net margins very thin |
| Auto Repair | 40–60% | 8–15% | Parts at COGS; labor margin varies |
| Trucking / Transportation | 15–30% | 3–8% | Fuel, driver pay, maintenance are high COGS |
| Staffing / Temp Agency | 20–35% | 2–6% | Wages to placed workers dominate COGS |
| Manufacturing | 25–45% | 5–12% | Raw material and direct labor intensive |
Common P&L Red Flags Lenders Watch For
- Declining revenue year over year — even if still profitable, trending down is a red flag. Lenders want to see the trajectory.
- Gross margin eroding — if gross margin was 50% two years ago and is 38% now, costs are outpacing revenue growth. May signal pricing pressure or operational inefficiency.
- Large/inconsistent "Other Expenses" — unusual one-time items require explanation. What caused them? Are they truly non-recurring?
- Owner compensation below market rate — if you're paying yourself very little to make the business look profitable, lenders will adjust this to fair-market salary before calculating DSCR.
- DSCR below 1.25x — for SBA and bank loans, this is often a hard stop. The business doesn't generate enough cash to service the requested debt.
- Net losses for 2+ consecutive years — while some businesses are in a growth investment phase, consecutive operating losses require explanation and a credible turnaround narrative.
How MCA underwriters use P&L differently:
MCA underwriting is primarily based on bank deposit history — not P&L. But voluntarily providing your P&L to an MCA underwriter can increase your approval amount. A P&L showing strong gross margins signals that your deposits reflect real profitability, not revenue-only businesses running at a loss. This builds confidence for higher advance amounts or better factor rates.
Frequently Asked Questions
- What is a Profit and Loss Statement (P&L)?
- A Profit and Loss Statement (P&L), also called an Income Statement, is a financial report showing your business's revenues, costs, and expenses over a specific period. It answers: Did the business make or lose money? The P&L flows from gross revenue through COGS to gross profit, then subtracts operating expenses to reach operating income, then accounts for interest and other items to arrive at net income (the "bottom line").
- What is the difference between gross profit and net profit?
- Gross profit = Revenue − COGS (direct production costs only). It measures production efficiency. Net profit (net income) = Revenue − ALL expenses (COGS + operating expenses + interest + taxes). Net profit is the true bottom line — what the business actually earned after paying everything. Gross margin is usually much higher than net margin. A restaurant might have 65% gross margin but only 6% net margin because of rent, labor overhead, and other operating expenses.
- What is EBITDA and why do lenders use it?
- EBITDA = Earnings Before Interest, Taxes, Depreciation, and Amortization. Lenders use it because it strips away items that vary by financing structure (interest), tax situation (taxes), and accounting methods (depreciation/amortization) — leaving a purer view of operating cash generation. EBITDA is the numerator in DSCR (Debt Service Coverage Ratio). Formula: DSCR = EBITDA ÷ Annual Debt Payments. Most lenders require DSCR of at least 1.25x.
- How do lenders use my Profit and Loss Statement?
- Lenders extract: (1) Revenue trend — is the business growing? (2) Gross margin — is production efficient? (3) EBITDA — can it service debt? (4) DSCR — specific loan serviceability check. (5) Net margin consistency. SBA lenders require 2–3 years of P&Ls. Conventional bank lenders usually want 2 years plus YTD. MCA providers typically use bank statements as the primary underwriting input, but P&Ls can support higher advances.